If you offer a 401(k) retirement savings plan to your employees you may be on the hook for a complicated set of fiduciary responsibilities. And feigning ignorance about what in the world “fiduciary” means won’t get you out of them.
Understanding fiduciary responsibility
Fiduciary, the word, has to do with trust. As it relates to your 401(k), the government—specifically, the Department of Labor, acting under the Employee Retirement Income Security Act (ERISA)—cares that plan participants can trust that the plan sponsor, administrator, trustee and, if applicable, investment adviser, are working in their best interest. That means the plan has a variety of investment options to choose from, fees are reasonable, deposits are made in a timely fashion, 5500 forms are filed yearly, and so on.
The DOL outlines the four main 401(k) fiduciary responsibilities:
- Run the plan solely in the interest of participants and beneficiaries and for the exclusive purpose of providing benefits and paying plan expenses.
- Act prudently and diversify the plan’s investments in order to minimize the risk of large losses.
- Follow the terms of plan documents.
- Avoid conflicts of interest.
Failing to carry out these responsibilities makes the fiduciary liable—and therefore exposed to legal action. Unfortunately, as Alicia Munnell explains in this MarketWatch article, “Instead of issuing specific guidance on how plan fiduciaries should act—such as providing concrete factors to consider in determining whether fees are reasonable—(the DOL) has tended to ‘regulate by enforcement’ after the fact. While this approach provides the agency with the flexibility to identify emerging issues as they arise and tailor any response to specific circumstances, it also means that fiduciaries are often left to guess at what practices comply with the law.”
Also unfortunate for employers is the fact that the number of 401(k) lawsuits has surged in recent years, with the majority of the increase due to excessive fee complaints.
Understanding your fiduciary responsibility
So, when an employer contracts with an outside vendor to offer a 401(k) plan, who’s the responsible fiduciary?
It’s complicated, says Gary Bednar, XMI’s benefits and 401(k) specialist.
If your company contracts with a 401(k) plan administrator, that vendor has a fiduciary responsibility, but it also doesn’t absolve the employer of all fiduciary responsibility.
“The company owner still acts as the plan sponsor and trustee,” Bednar says. “And they’re still responsible for decisions about the plan and monitoring the other parties involved, such as a plan administrator or investment advisor.”
The best way to understand your responsibilities is to read your service provider contracts, which should clearly outline fiduciary responsibilities.
How to transfer your 401(k) fiduciary responsibilities to XMI
If you discover that you don’t have the time or expertise to navigate your fiduciary responsibilities appropriately, there’s another way. When a company partners with XMI’s professional employer organization (PEO) and joins the XMI multiple-employer 401(k) plan, most of the fiduciary responsibility transfers to XMI and to its third-party 401(k) administrator, Slavic401k.
“Because of co-employment, our customers are co-adopting our plan,” he says. “By doing that, they limit their risk and significantly reduce their fiduciary responsibilities. We take care of all of it.”
Depending on the current market, XMI and Slavic convene either an annual or semi-annual investment committee meeting to review the lineup of investment choices and make sure it aligns with meeting the investment needs of participants.
Another example of XMI’s emphasis on fiduciary responsibility is its handling of 12-b1 fees, which are essentially kickbacks from the mutual fund that are used to help cover the plan’s administrative costs. “We have a policy that automatically credits those fees back to the participants so that we avoid the potential of being out of compliance with ERISA.”
And XMI also periodically reviews its current third-party administrator to “be sure what we are offering is competitive and the best in the industry,” Bednar says.
What’s more, by virtue of being a multi-employer plan, XMI’s 401(k) has more assets in the market and therefore has access to better investment share classes, which have lower overall fees than the funds available to single-employer plans.